by Will Ashworth | May 15, 2013 10:55 am
According to the Natural Foods Merchandiser, some $90 billion in natural and organic foods were sold in 2012.
Phew. That’s one big number … and it’s bound to get even larger as more Americans move towards health-focused lifestyles. Heck, that’s why companies like Sprouts Farmers Markets have been lining up to go public.
The value proposition for natural foods stocks was much better a year ago than it is today, though. Of course, that doesn’t mean you shouldn’t buy any. It just means that you’ll want to be more selective given how well most have done so far in 2013.
With that in mind, let’s sort through the companies to find which to buy, sell and hold.
Last August, I chronicled the performance of five natural foods stocks from the market lows in March 2009 through August 31, 2012. Atop the list of companies was Whole Foods Market (NASDAQ:WFM), up 735% over the 41-month period.
Since then, WFM has tacked on around 5% over the past eight months, badly trailing the SPDR S&P 500 (NYSE:SPY), which achieved a total return of over 12% over the same period. In fact, had WFM not announced second quarter earnings last week that beat expectations — which boosted the stock a nice 10% — it would actually be down since last year’s article.
Of course, that just gives you a nice entry point. Plus, its 2-for-1 split ahead is another a sign investors are going to be clamoring for its stock in the months ahead.
Next up on my buy list is Usana Health Sciences (NYSE:USNA). While more of a health and wellness company rather than a food business, it’s well-run and trading at or around its all-time high over $61. It’s a clear momentum play, with eye-popping 85% gains in the bad so far this year alone.
That’s because Usana continues to deliver stellar results. In its first quarter, revenues increased 10% to $169.1 million and EPS boomed 42% year-over-year. Based on its good start to the year, it’s revised its EPS upward for 2013 to at least $5.25 per share from the previous forecast of $5.10. Another few months of solid performance and its market cap will go over the billion-dollar mark.
Sold in grocery stores of all descriptions these days, Annie’s (NYSE:BNNY) went public last August at $19 per share. In its opening day of trading it gained 89%. Since then it’s basically gone sideways.
My biggest concern with Annie’s big opening and other gains? It gives the stock an enterprise value 32 times EBITDA. Plus, as it continues to mature, the overhead’s going to increase and the margins will likely decline. The IPO price of $19 was fair value for its business. In the upper $30 range, I think it’s overpriced and ready for a price adjustment.
I’m going to go with a contrarian call for my other sell recommendation: Natural Grocers by Vitamin Cottage (NYSE:NGVC). Why? Well, because it has the worst corporate name in the history of business. Imagine putting that on a business card.
In all seriousness, though, the company’s operating margins are about 50% less than Whole Foods while its enterprise value is 25 times EBITDA — 67% higher than Whole Foods. I understand that the natural foods grocer is growing revenue and earnings at 20% or more each quarter, but Whole Foods isn’t too far off that and its annual revenues are about 33 times larger. Having doubled in price since its $15 IPO last July, I think it’s time to take some profits off the table.
For both of my “hold” picks, I’ve gone with companies that rely on Whole Foods directly and indirectly for their survival. Hain Celestial Group (NASDAQ:HAIN), for one, sells approximately 18% of its products to United Natural Foods (NASDAQ:UNFI), the country’s largest natural foods distributor, which in turn generates 37% of its revenue selling to Whole Foods.
If you own either of these stocks, I’d have no problem continuing to hold them.
Hain Celestial has expanded into the UK market in the past few years and now represents about a quarter of its overall revenue. As HAIN increases its operating margins to match those in the U.S., its overall profitability is sure to rise. Having said that, its PEG payback is 9.4 years, which is higher than I’d like to see.
As for UNFI, the fact that it’s the primary wholesale grocery distributor for Whole Foods until at least September 2020 means it’s going to ride the retailer’s coat tails to success. On the downside, its PEG payback is 9.3 years, also too high, especially given its thinner margins.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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